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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to Arthur J Gallagher & Company's Fourth Quarter 2017 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.
Some of the comments made during the conference including answers given in response to questions may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks and uncertainties discussed on this call are described in the Company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today and the company undertakes no obligation to update these statements.
In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the Company's website.
It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President, and CEO of Arthur J Gallagher & Company. Mr. Gallagher, you may begin.
Thank you, Darren. Good afternoon. Thank you for joining us for our fourth quarter 2017 earnings call. With me this afternoon is Doug Howell, our Chief Financial Officer, as well as the heads of our operating division.
As I do each quarter, today I'm going to touch on the four key components of our strategy to drive shareholder value. Number one, organic growth; number two, growing through mergers and acquisitions; number three, improving our productivity, quality, and margins; and fourth, maintaining our very unique Gallagher culture. The team once again executed an all four of these this quarter and well what a great quarter and a fantastic year.
Last year, around this same time I said that 2017 brokerage organic felt like it would be similar to 2016 and it turned out to be better at 4.4%. I also said that I expected our 2017 risk management segment organic would improve over 2016 and it came in better at 5.2%. Putting the two together, for the year, the combined brokerage and risk management segments posted 4.5% organic, truly a fantastic year that reflects our incredibly strong sales and service culture.
Now back to the fourth quarter results, starting with some comments about our brokerage segment. First organic growth. Fourth quarter organic growth was 6.8% all-in representing strong growth across all of our business units both domestically and internationally.
In the U.S., our PC brokerage business generated 5.7% organic growth in the fourth quarter, with retail up 5.6% and wholesale up 6.3%. In terms of the PC pricing environment in the U.S., we're seeing commercial auto up about 3%, property up about 1.5%, other cash reliance up about 1.6%, specialty lines up towards a point, professional lines are flat, workers compensation down towards two points, and frankly, when I look at that, that's a flat market. So very little impact on our domestic PC brokerage organic in the quarter, which is a slight improvement from what we had been experiencing earlier in 2017.
When it comes to exposures; we are seeing some better signs of exposure growth in the recent couple of quarters. International property/casualty brokerage organic growth was 7% in the quarter. Australia and New Zealand were up around 9%, the UK was up 5%, and Canada was up 6%. In terms of PC pricing outside the U.S., Australia and New Zealand are experiencing the strong price increases in the mid-single-digit range. Our UK retail and Canadian operations are seeing a more stable rate environment while London specialty operations are now seeing a bottoming as underwriters are asking for rate. Time will tell if that sticks.
Our Employee Benefits business generated organic growth of 7% in the fourth quarter and surpassed $1 billion of revenue for the year, a testament to the outstanding work of our more than 4,000 benefits teammates. I'm proud of how this business has delivered so much valued advice to our clients over the years, trying to navigate the ups and downs of the ACA as they tackle the task of managing their total employment costs in a competitive employment environment.
Next, let me move to merger and acquisition growth. During the fourth quarter we completed nine brokerage acquisitions at their multiples. The average size of the nine tuck-ins we completed in the quarter was $3 million of annual revenue. Our mergered acquisition pipeline remains robust with over $300 million of revenues associated with more than 40 term sheets either agreed upon, issued, or being prepared. The pipeline is full of excellent golden opportunities mostly in the United States but also some good opportunities around the world.
Not all these acquisition transactions will close, but I feel good about our ability to attract acquisition partners in our typical small tuck-in size at fair prices. Our merger partners see our vast capabilities, believe in our unique culture, and realize that we could be more successful together. I'd like to thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals.
So how did we do for the year in our brokerage segment? 9% total adjusted revenue growth of which 4.4% is organic, adjusted EBITDAC growth of 11%, adjusted EBITDAC margin 27.4%, up 52 basis points over 2016. That's an excellent year for our brokerage business. Looking forward, I think 2018 brokerage organic will be similar to 2017 perhaps even a little better if PC pricing and exposures continue to improve.
Next I'd like to move to our risk management segment which is primarily Gallagher Bassett. Fourth quarter organic growth was 3.3%. The call we posted over 10% organic in the third quarter and accordingly we forecasted 2% to 3% organic in our December IR Day. So a bit lumpy by quarter, but a 5.2% for the year a terrific uptick over 2016. Stronger organic in the quarter was the primary driver of our adjusted EBITDAC margin of 17.4%, a great result.
In terms of productivity and quality at Gallagher Bassett we have an outstanding differentiated value proposition that continues to be recognized as best-in-class. For example, in the 2017 advice and claims satisfaction survey, Gallagher Bassett was the highest regarded in casualty claims handling. Not only where we rated significantly higher than all the TPAs, we also ranked ahead of all carriers recognized in the survey.
Our technology was also recently recognized. In the Independent 2018 PRIMUS report issued by two industry veterans, our Luminos System was recognized as the TPA leader with the highest net promoter score and most comprehensive in system capabilities and solutions offered among all TPAs. These are just two accolades that highlight the continuous investments we're making in the very best people, processes, and technology that are necessary to increase productivity, while consistently delivering the highest quality and to marchably superior outcomes for our clients.
So for the year in our risk management segment, 7% total adjusted revenue growth of which 5.2% is organic, adjusted EBITDAC margin was 17.4%. A very good result and we expect our risk management segment's 2018 organic and margin performance will be similar to the full-year of 2017.
And finally, our culture. We've built a very talented team of professionals who work across geographies, across divisions to deliver high quality insurance, risk management and consulting solutions to our clients every day. And we run the business according to a core set of tenants which are focused on teamwork, ethics, outstanding client service, and a dedication to the communities we operate in.
A great example of our culture is when we celebrated our 90th anniversary this past October. We set a companywide goal of 90,000 hours of curable work over the next 12 months. I'm proud of how our colleagues have responded already. Just four months in and we are well on our way to exceeding that goal.
Okay, a great quarter a fantastic year. I'll stop now and turn it over to Doug. Doug?
Thanks, Pat and hello everyone. Like Pat said a truly excellent fourth quarter and full-year 2017.
Today, I’ll highlight a couple of items behind the headline numbers in the earnings release. I'll then move to the CFO commentary document that we posted on our website to help you think about 2018 and tax reform, and then I will end with some comments on the forthcoming new revenue recognition standard.
Okay, to the earnings release. Page 4 to the brokerage segment organic growth table, 6.8% all-in organic, what a great quarter and terrific finish by our sales and service professionals. Under the 6.8% we did have some minor timing. Recall in our third quarter I explained that we had some negative timing that would catch up in the fourth quarter and so it did. That said, even levelizing for that timing, we would have posted about 6% organic growth still really excellent performance.
Next turning to Page 5 to the brokerage segment EBITDAC margin table at the bottom. Headline adjusted EBITDAC margin was up 37 basis points in the quarter underlying that we did have two one-off items that compressed our margin expansion. First, our partially owned Mexico based affiliate had a tough quarter due to the Earthquake in late September that cost us about $1.5 million; and second, we did have a one-off technology improvement project in our U.S. brokerage operation that cost us about $2 million. Without those one-off items, margins would have expanded about 70 basis points and that feels about right on organic around 6%.
Looking towards 2018, it would be hard for us to expand margins on organic growth at 3% or less but there could be some margin expansion on organic over 4%.
As for risk management nothing under the headline results, just really solid year, a really solid year at 5.2% organic and adjusted margins is 17.4%. And like Pat said we see for the risk management segment 2018 a lot like 2017 in terms of organic growth and adjusted EBITDAC margin.
Next let's turn to Page 7 of the earnings release to the corporate segment and then look at the clean energy line. You'll see we had an excellent fourth quarter for clean energy. A bit of that was due to the cold snap we had in late December but have capped off another excellent year, a $133 million of after-tax earnings that's up 16% over 2016. We also had some better than expected results on the corporate line, mostly due to tax benefits from additional stock option exercises in the quarter.
Finally, in the corporate table, you will see that we added a new line that shows the changes as a result of the U.S. Federal Income tax law changes. It came in a bit better than we estimated on December 22, when put out our special tax reform related commentary.
As for cash, at December 31, we had about $315 million available on our balance sheet. With our strong cash flows we should be able to fund M&A with free cash and debt coming to 2018 as well as the bump up in our dividend that we announced yesterday.
Let's leave the earnings release and move to the CFO commentary document that we posted on our website. I'll talk about pages 2 and 3. On Page 2, you will see that nearly all of the fourth quarter 2017 actuals came in very close to our estimates that we provided at our December 12 Investor Relations Day. Also on both Pages 2 and 3 that we took a shot at some estimates for full-year 2018. However because of the new revenue recognition standard at this time, we are not comfortable providing 2018 quarterly estimate. We hope to provide quarterly spreads at our next Investor Day.
A couple noteworthy items related to 2018 estimates. On Page 2, you will see that with the dollar weakening, FX could turn to a slight tailwind in 2018. In today's rate, it might feel EPS by a penny a quarter or so.
On Page 3 in the pink box you will see that most of the corporate line estimates for 2019 are consistent with 2017, except when we now get a federal tax benefit of 21% versus 35%.
As for our clean energy estimates for 2018 also that we show on Page 3 a couple of comments. First, we're still working with our utility partners but at this time it looks like production levels in 2018 could be similar to what we experienced in 2017. And we also believe that production cost in 2018 would be similar to 2017, however those costs are now tax benefited at a federal rate of 21% versus 35%.
So you will see that our range of earnings in 2018 is in the $105 million to $115 million range versus the $133 million we posted this year. We still expect those investments to generate over $225 million of tax credits. So tax reform does not reduce the amount of tax credits we can generate, that's a really great outcome.
At December 31, 2017, we have approximately $700 million of tax credits that will reduce our cash taxes paid for a very long time and that doesn't change much with tax reform either.
So talking about tax reform, flip to Page 6 of the CFO commentary, we have again provided our best look at comparing our pro forma for 2017 as if tax reform happened January 1st of 2017. We hope that is helpful in understanding the impact on EPS. But a couple of important note. First, you'll see that our core brokerage and risk management operations benefit substantially from tax reform, but our corporate cost don't benefit as much.
Second, I have always said that be careful, as you digest in your thinking, when looking at EPS, when it comes to clean energy, it is not a core business but rather an investment that generates some cash that can be reinvested into our core operation. So being a bit down in EPS really shouldn't matter.
Third, the most notable number to me is the amount of cash taxes paid. In 2017, we will pay about $56 million in cash taxes globally. When we pro forma 2017 for tax reform, you will see we would have effectively had no cash taxes paid. That's globally. We believe that will be the case in 2018. So regardless of how you measure it, tax reform deliver substantially more positive cash flow. When you look at it longer-term here is how we think about it, because we have nearly $700 million of tax credits on our balance sheet and because we believe we can generate about $225 million of credits annually in 2018 and 2019 and then about $180 million of credit annually in 2020 and 2021, it looks on a global basis, our net cash taxes paid will be about 1% of our EBITDAC for the next three of four years since starting in 2011 or 2022 globally we will be paying taxes of about 7% to 10% of our EBITDAC through the late 2020. Clearly a lot can change over the next decade but that shows the cash generation power of tax credit and investment. So that was an upchange for you to digest.
Let me offer a few comments on the forthcoming accounting change related to revenue recognition. First, we're well and along in our implementation of the new standard.
Second, we plan on doing a full retrospective method. That means we will recap all the historical numbers for each quarter going back to January 1, 2016. We will provide a reconciliation between old GAAP and new GAAP that explains the changes and also provide it in a format that allows you to easily compare the quarterly numbers under new GAAP.
Third, we hope to have a special Investor Day in late March or first week of April to give you that reconciliation and the new GAAP numbers. That should give you time to digest prior to us releasing our first quarter 2018 results which will be solely on the new GAAP basis.
Fourth, here's what we now as of now all which could change over the coming years. First, we believe that our cumulative effective of the change will be positive. One could interpret that to mean than old GAAP was more conservative than new GAAP for us. We also believe that new GAAP will change our quarterly seasonality in both the brokerage segment and for clean energy investment earnings that are reported in our corporate segment, but that won't have -- but the new GAAP will not have much quarterly movement at all-in our risk management segment. And then, third, we believe that new GAAP will change our annual earnings upward in the brokerage segment but no real impact annually to the risk management segment or to the corporate segment.
Okay, with that said let me once again congratulate our sales and service professionals for a fantastic quarter and a great year. We had terrific momentum coming into 2018. Back to you, Pat?
Thanks, Doug. Darren, you want to open this up for questions, please?
Thank you. The call is now open for questions. [Operator Instructions].
Our first question is coming from Elyse Greenspan of Wells Fargo. Please state your question.
Hi good evening. Congrats on a really strong growth quarter. I guess my first question in terms of the organic you guys said it was about 6% when you adjust for some seasonality in the shifting. So when you're setting your outlook for I guess about 4.4% which is or a little bit higher which was a full-year 2017 level, what do you think, things will change I mean it doesn't sound like other than the shifting that things won't maybe get better from here, if you get some more price in 2018.
Well, I think what we're saying is right now, we think what we did in 2017 can repeat in 2018 maybe a little better, if pricing continues. We did see an uptick in the fourth quarter. As a matter of fact, we went think 3% in the first quarter, 4%, 4% 6% I don't think you can count on 6% in 2018. We had a terrific quarter and we had a really strong delivery on several of our units but so we feel somewhere in that mid 4% range is better for 2018.
And when you think like the mid 4% range for 2018 what type of pricing environment are you guys assuming in there?
Essentially flat.
So if prices pickup, there could be some upside to that number.
That's right. We're seeing some price increases across various lines for instance that is most properties getting some bump, transportation is but there's still some softening areas like workers' compensation, overall flat.
Yes, I think the bigger story for us would be exposure growth and you really do have an acceleration of the economy that drops in pretty quickly. Sometimes prices come out strong but customers have the ability to opt out of price not so they have the ability to take deductibles up, buy less cover on the top end, so they will control their annual spend on insurance and we talk about opting in and opting out all the time.
Exposure group is something different. It's harder for them to control. If they add another truck, they've got to ensure the other truck and so if we get a hard economy exposure growth could help us top over that top over 4.4%.
Okay, great. And then in terms of that you guys provided a lot of disclosure on the pro forma impact of tax reform. I know part of it is, should that your, if we looked at the details you guys provided about a year ago probably a little bit more of an upside to 2016 and 2017 numbers. And I think part of that was due to some deductions that you guys are losing. Could you just give us a little bit of color there, so we could understand the delta more between the two years?
Right. There's about three things there let's go to the first one. First and foremost when we provided our commentary last year related to 2016 like I said, I think the most important number is the cash taxes that we pay globally. Last year I think by my memory is right, we would have said that we would have paid in 2016, we paid about $66 million of taxes and had tax reform happen at 2016. We would have paid about $40 million, so only about a $26 million improvement in cash.
Our results now in 2017 will show about a over $50 million less cash taxes paid, so that's a good outcome. Some things that take on the rates, I think our outlook last year was done on a 20% rate and we're at 21% now. I think that there were deductions that we lost in tax reform, that we didn't anticipate in the 6 -- when we were looking at 2016 results, so you add all that up, and then the other -- the last thing is the shift in income we have, last year we had substantially more integration expense in our international operations that's not there now. So as a result those were operating higher tax jurisdictions now that erode some of that differential between the years. But by and large if you focus on the cash number all these things will end up in a better cash flow situation despite how it looks on an EPS basis or a pro forma basis.
Okay, great. And then one another question you guys are, the growth that you guys saw in the contingents and supplementals also looked pretty strong in the quarter was there some seasonality there and then what's the outlook I know it's included within your all-in number but for contingents and supplementals for 2018?
No, nothing special in the fourth quarter and looking forward, we're not seeing a lot of pressure right now obviously our Mexico affiliate got hit because of the earthquake that hurt us a little bit this quarter but that comes through a different line. But I'm not [indiscernible] contingent or supplemental coming into the year at all.
Our next question comes from Arash Soleimani of KBW. Proceed with your question.
Thanks. Just the first question in terms of the benefits to the broker segment from tax reform obviously has a pretty -- it's a pretty nice tailwind there. To what extent you expect that to fall to the bottom line versus resulting in higher compensation or other sorts of items that could reduce the bottom line impact.
We don't run our company based on what the after-tax numbers are. We're an EBITDA focused company. So I think that's something that we'll continue to do is focus on that number. Second of all, when you really look at the information we gave you, interestingly enough, we're showing you the statutory rates. I think it's important to know had we recapped the last years pro forma and used really when you get out a few years 5.25% is what we will be paying in income tax in our domestic operations, when you get out about three or four years from now because of the tax credit, the gearing that you would see in the brokerage and risk management segment would go up lot. So here -- it's already up 15% now in those core segments together, you move that 21% rate down and the math down to 5% you'll pick up a ton more increase there.
Okay. So based on the comments where you're obviously you're basing everything -- you're running the company based on EBITDA sounds like that's something where it really should be expected to kind of hit the bottom line and it kind of if anything gives you more, capacity for M&A.
That's right.
That's right.
Okay. And the IT refresh that you mentioned can you just remind like how often would something like that would occur in the business.
Here everyone is where we have an opportunity to really see an opportunity to improve something and so we took at this quarter. So it's a little hit or miss whenever we do that.
Our next question is from Kai Pan of Morgan Stanley. Please proceed with your question.
Good evening. Thank you and congrats on the strong finish. My first question just follow-up on the Elyse question on the organic growth in the fourth quarter. Can you give a little more color as to what's really behind the 6-plus-percent organic growth and why it's not repeatable?
Well, Kai, this is, Pat. We snatched it in the fourth quarter. Our sales people killed it and that just don't happen every quarter.
All right. I take that. Then the on the margin front I just wondering like you grow about 4% and if you look at the margin for the full-year actually it could expand even more, especially I'm looking at your comp expense ratio for the full-year roughly flat year-over-year. So why wouldn't it have more sort of wage or like expense leverage.
Well, first and foremost, remember what makes the money for the stockowners that’s our people and a lot we pay our producers based on what they produce and they participate in that so we like a comp ratio or it's been. That comp ratio is kind of being the comp ratio for us for 30 years, 40 years something like that. So there is opportunities for some leverage in that but really we still have opportunities in our operating expenses. And I know there are wage pressures that are out there -- there is -- as we reach full employment in many of the countries it's more competitive for people. So we can hold the comp ratio where it is continue to go after our productivity list on the operating expenses we see that as the way we will expand margins that if we come in somewhere in the mid 4s.
Okay. And one last question is a number question is that if you look at your reported in a pro forma for the corporate segments and especially the corporate lines it you looks like under the new tax law looks like the losses will be double the prior so a tax regime. So but if you look at a forecast for your net earnings or net losses in that line in 2018 is roughly the same as the 2017 I just wondering why is the losses not more in the corporate line.
There were some one-off items in the corporate item that we just don't see repeated again. I think especially if you throw in the move and the tax reform items and that the -- there were matters related to the litigation that we won three years ago, that we're running through there, there is some cost that won’t repeat. So that is why we think it’s we will perform about as well even after-tax reform.
[Operator Instructions].
Our next question comes from James Naklicki of Citi. Please proceed with your questions.
Yes thanks guys. I don't want to beat a dead horse here, but when we met with you guys in December I believe the guidance in brokerage was for 3% to 3.5% and you did 6%, so was there sort of a lot of upside to that number in the second half of December or was there organic pulled from the first quarter of 2018 into that fourth quarter number. I guess that's my first question there, I have a follow-up as well.
The answer to that is no. I will go to the guidance remember our guidance in the third quarter I don’t think when we actually said 3% to 3.5% if we did maybe we will be just a little conservative on that. I think our guidance really was and we didn’t expect any margin expansion and we ended up getting 40 to 70 basis points on how we measure that. But we said that and at the time when we're sitting there in December week we had a terrific December, so based on through November we are probably some place in that, 3% to 4% range so.
Got it. So strong December got it, okay.
Yes.
And then my follow-up is on corporate, so before the adjustments I thought you guys were looking for a profit there and there was a little bit of a loss, so can you just walk me through what the weakness was for net income before the adjustments.
All right. Let's go for the corporate segment if you look at what we expected and what we published on December 12, we hit exactly what we thought on interest expenses maybe a little bit better, so got better there. We blew the doors off, as Pat said, on clean energy. So we came at the higher end of the range on our earnings on that, and we also have less loss on the corporate line of corporate there and maybe we didn't really forecast any lease move related to our headquarters, so that came in right. So maybe you are looking at I don’t know what you are exactly looking at but we did book our tax reform adjustments which was about $29 million charge, as we adjusted our deferred tax assets as we adjusted our transition tax, and a few other items that we adjusted some actual to current differences there but returned to actual provision items there. But by and large I think all of our numbers actually beat the expectations that we laid out in December.
Got it, got it. So is tax reform. Okay, thank you very much.
[Indiscernible] why you are not looking through?
Our next question comes from Adam Klauber of William Blair. Please proceed with your question.
Good morning guys, couple of different questions. Wholesale had a good quarter after the tough weather, are you seeing more inflow of risk into the market?
Yes I would say that's especially around the catastrophe stuff. There is an awful lot more marketing going on; people are pushing to rate there. It’s not holding across the board but yes more people are in the U.S. market.
And so can you remind me what the seasonality for the property renewals, is it pretty even does more stuff come up before the summer?
No it's pretty much second and third quarter.
Second and third quarter all right, those are the bigger quarters, right?
Yes.
Yes, right.
Yes, yes. So, we will probably get a good idea of after the second quarter if there is more of an increase in some of that properties; is that right?
Yes, correct.
Okay. As far as the benefits business, I think you mentioned 6% that seems better than it has been I’m not sure who said that number but what's driving the growth there?
Probably I think that whenever we benefit from confusion and change. And when you got the reform stuff going on and Washington, changes to the ACA, our people need an awful lot of help of that. Now the other thing that's driving it is we're making sure that our clients realize that we’re not just about health instance, what we are doing is trying to help employers become the destination employer and in this work environment we are approaching full employment that's important stuff. So our voluntary numbers are up, our consulting numbers and HR are up, our health insurance numbers are up nicely but it really is across the board.
And I know you have added in the last couple of years, you've invested in this practice added a fair amount to it, is that allowing to go up market a bit, I'm not talking about the Jumbo’s but are you getting some of our declines also?
Yes. Yes it is definitely. We're competing well on multithousand life cases now against some of the stronger competitors.
Great, that makes sense, okay. What was -- if you could give us a general idea, what was the growth in your producer force in 2017 versus 2016 and I guess what are your thoughts on 2018?
Well I got it.
Our producer headcount was up 1% excluding acquisitions.
If you add acquisitions, which is accretive to production headcount you got that number.
See if I can get there for you, Adam.
Okay, yes, I would be interested in the total number. And then as far as one, there's an investigation going on in London it would be interesting your thought there in. Do you have a wholesale London business and if so how big is that?
Really big, really big. I mean I don’t have a revenue number for you off the top of my head but it’s really one of the largest London brokers in the London market and yes the FCA is looking at the entire wholesale industry and we always believe that we do it right for the client and frankly we support the FCA's effort to look at that.
Thanks. The nature of our wholesale business in there is moving business into the London marketplace, it's not nearly as big when you look at side cars and programs and that. So it's not really that type of business that the popular press is talking about.
Right, right. So my understanding you haven't done a lot of the big facilities, a lot of the big programs that some of the other -- some of your other competitors have is that in general is that on point?
That's correct.
Okay, okay. Very helpful. Thanks guys.
Thanks, Adam.
Thanks Adam.
Have a good night.
We are adding about 5% producer headcount as a result of acquisitions last year, also the follow-up.
Our next question comes from Mark Hughes of SunTrust. Please proceed with your question.
Thank you. The M&A environment with tax rates going down is that pushing out multipliers are either in private equity or you all paying more for these after-tax dollars?
Yes, I think there will probably be a one turn and a multiple as a result of it.
Is that going to bring more deals to the market, or should that be a tailwind in 2018?
Yes, I think so. I think that -- I think this -- but remember the real motivation for somebody to join us is they want our capabilities and our resources and that is also accelerating even more rapidly. So the money will be better for those folks that are selling. But I think that the reality of this as this gets to be much more of a complicated business especially take our benefits practices we just talked about, it is very confusing and we have some really, really great smaller brokers out there that when they join us, they continue to grow great service to their customers when they throw in our capabilities. We see is really right environment next year.
And then any restrictions on private equity leveraging up with tax reforms is that going to make a difference?
You know I haven't really looked at the math but when it comes to the interest non-deductibility matter but again to be honest if somebody is interested in selling to a PE firm they're probably not interested in adding capabilities to our resources they just want to be a part of a friend [ph], of a label. We don't -- we don't do well with people that don't have any interest in our capabilities and the resources that we bring. So I don't see it as impacting our results, the number of what that we'll have next year will be up and maybe for PE too, but I think there is plenty of them amount there.
And then on risk management, we think about workers comp claims any commentary on the underlying trend there, any indication that the stronger economy could lead to increased frequency?
So far, we're seeing Mark about a 1% uptick and not a huge uptick there.
So that's just the same no, no changes?
Not so far.
Yes. Okay.
Payrolls go up especially if we get into any big infrastructure spend that the financial type job they don’t have nearly as many workers comp claims, but we if get into a big construction boom here in the U.S. you'll see those numbers go up.
Our next question comes from Arash Soleimani of KBW. Please proceed with your question.
Thanks. I just had a quick follow-up. When you said the organic in 2018 would need to be closer to 4% and 3% for margin expansion can just remind me why it would be a higher organic requirement next year or this year?
We've always said that. We've always said tough to expand margins if it's 3% or less. There's a little wage pressure out there right now. So if we get to 4% there's margin expansion probably, someplace between 3% and 4% we will see how the year comes out. I would hope so but you just never now in this environment, being a low cost on that.
Our next question comes from Kai Pan of Morgan Stanley. Please proceed with your question.
Yes. I have two follow-ups. Number one is that could you talk a bit more about your technology investment and how do you think sort of technology could disrupt the brokerage business.
Well, I think if you take a look at the numbers around and InsurTech investments there is billions of dollars flowing into this industry. We're doing I think a pretty good job of watching that. And we're of course doing all we can to utilize technology to continue improve our business. But so far the things that we watched and followed some are very clever but I don't see them as being a drastic disruptor in particular where we stake out our position in the marketplace is as a trusted advisor.
Yes, we do have some electronic broking that we do around cyber, we will quote a couple hundred cyber quotes a month literally touch free and that's actually a day when I think about its not a month, it’s a day, but that's not a huge part of our business where we make our money and where we hold onto our clients is by being the person that they rely on for advice and I don't think that's going away.
And two things. If you look at InsurTech that's really improvement of service tech. We have some pretty exciting things going on in terms of helping us improve our service to the customers when it comes to distribution RPS on the wholesale side is the place that's putting good wholesaler to broker type capability then it will allow them to quick quote cyber umbrella etcetera. So those are the places that have but when it comes to just pure distribution tech selling insurance in their way pretty hard when our customers are buying four, five different policies on the account. Because typically those are 1-type -- one single coverage type policies, and that's really not what we specialize in. We're a little further upmarket than that.
Okay, that's helpful. But my last one is on your tax strategy, you have Glencoe business to lower your effective tax rate but now the U.S. tax law sort of changes the playing field is more less leveled are you going to pursue other tax strategy after expiration of Glencoe in 2021.
Well, there is two different questions. I just want to make sure that our tax credit strategy was always there to take our rate from the regular rate today and T-rate so that goes -- used to go from 35% to 20%. Now with the way while our work we will be able to take our rate from 21% to 5.25%. So it's almost exactly the same 15% setbacks in the rate, so the amount that it produces for us is nearly identical.
When it comes to the longevity of the program right now we have credits that we believe even with some rapid growth in the U.S. if you just model it out that our tax credit will last as well as into the late 2020. So what the next up in tax credits, you got a decade or more to figure it out. So it's not something I feel like we need to rush and do today. To put more money into something that we don't need tax credit say until 2030. But I think we're pretty well-positioned right now for the next ten-plus-years of our lives when it comes to a really paying, we can pay 5% U.S corporate tax for the next 10 to 12, 13 years that will be terrific wouldn't it.
[Operator Instructions].
Our next question comes from Elyse Greenspan of Wells Fargo. Please proceed with your question.
Hi, thank you. So I had a follow-up question on revenue recognition. So Doug you mentioned this split I believe be positive for your earnings. It's my understanding that for the most part annual revenue should be unchanged please correct me if I'm wrong, so and as we think about you guys adopting revenue recognition for 2018 I guess that's margin accretive and then when we think about I know another broker had said that they had seen an expense benefit in 2018 kind of like a one-year adjustment for the deferral of some expenses. Is your comment that it is positive to your earnings stream is that an ongoing not just a one-year comment, can you just kind of tie a few of those things together.
Yes, I'll do the best I can. It's highly complicated and but I think that you characterized it correctly I wasn't commenting on any one-time item other than the cumulative effect of the change that comes in, in January -- that will book basically 12/31/15 or January 1, 2016.
In terms of why their earnings elevate is in general revenues will go up, there'll be a small impact on EBITDA that will go up. I guess that would probably wash out in the margin to a certain extent but really we've been pretty conservative on when we recognize contingent commissions and also direct sales for carrier bills or installment bill policies. So that will be something that pulls forward. But then you also have the stuff we initiated that we get pushed back but there is a net uplift in it.
And when is the plan that you guys are going to give us I guess the pro forma's for 2017.
I think, I said in my open commentary that we hope to have that here by late March or early April, so.
And at that point you'll also give us the corporate earnings projections by quarter for 2018 because I notice we just got the full-year outlook.
Yes, that’s correct.
Okay. And then one last question I know there were some an earlier question just in terms of I guess the fact that things seem to have gotten better towards the end of December after your Investor Day. Do you guys have an initial view on how January has been that you can share with us entirely your full-year outlook for 2018.
No, because if we have that -- if we have that capability I would have been able to tell you on December 12 it doesn't all happen on the last day of the month. So I wish I did. But there's a sales business I know there is a rush at the end of the month in order get things booked. But I think at this point I really don't have a look at January at this point.
There are no further questions in queue at this time.
Great. I will make a quick comment as I wrap up. As we said a number of times 2017 was a fantastic year for Gallagher. I'd like to thank each and every one of our nearly 27,000 colleagues for their hard work. As we enter 2018 our focus remains on executing on each component of our value creation strategy growing organically, growing through tuck-in acquisitions, improving our quality and productivity, and maintaining our unique Gallagher culture. Thank you for being with us this afternoon and have a great evening.
This does conclude today's conference call. You may disconnect your lines at this time.